Egypt and the IMF: Time for a Different Approach

On April 2, a technical delegation from the International Monetary Fund (IMF) arrived in Cairo for a new round of talks over a $4.8 billion loan. This time, though, Egypt’s socioeconomic and political environment is much worse than the one the IMF team left behind last November when a preliminary deal for the loan was signed. That agreement, however, was suspended in early December at Egypt’s behest due to its failure to raise the sales taxes which were part of the IMF deal.

The December suspension was four months ago. Since then, Egypt’s financial needs have grown more dire, and its ailing economy has further weakened. The country’s transitional politics have turned messier and more polarized, and the sense of despair and hopelessness among the overwhelming majority of Egyptians has become more pronounced. Unable to fully implement the IMF-negotiated economic reform program under these hard conditions, the government produced a milder austerity plan in the hope that it would be able to sell it to the IMF and to the increasingly restive Egyptian public.

The current talks are likely to revolve around two main topics: the Fund’s assessment of Egypt’s new economic program and its offer to Egypt of an emergency short-term credit line of $750 million. The IMF has reportedly voiced its dissatisfaction with the amendments Egypt made to the November economic program, and Egyptian officials were said to be unenthusiastic about the short-term stopgap loan, favoring instead the original $4.8 billion deal.

Regardless of how the ongoing technical talks will progress, a more critical question is if an IMF-supported austerity program—revised or otherwise—can achieve its stated objective of macroeconomic stability, or instead throw Egypt into further chaos. Broadly speaking, whether countries’ fiscal balance can best be restored via austerity measures or by achieving high rates of economic growth has been extensively debated in recent months—particularly in the context of the troubled countries on the periphery of the eurozone . It is no secret that the IMF favors the policy approach of austerity. Egypt, however, is an entirely different case.

At its core, the country’s two-year-old economic crisis is a political one. One only needs to remember—if just to illustrate the point, and not to defend an indefensible pre-revolution past—that in the last six years of Mubarak’s reign, Egypt saw high levels of economic growth, was considered the darling of foreign investors, and had been constantly grouped among “emerging economies.” True: there were serious problems with respect to social justice and income distribution; growth was largely rent-based, distorted, and heavily tilted toward the more privileged and politically-connected segment of the population at the expense of the marginalized and impoverished majority. And it is also true that growth was achieved amid an autocratic, corrupt and oppressive regime, which ultimately led to its overthrow. Yet, this upwards swing (despite the shortcomings) shows that Egypt does have an enormous economic potential that could be tapped utilizing a different growth model that both responds to the country’s aspirations and provides its population with equal and decent economic opportunities.

Since the revolution, however, an increasingly turbulent political transition has led to a sharp economic decline, widespread social unrest, and internal safety and security conditions that were lately ranked behind Pakistan, Chad, and Yemen according to a recently published World Economic Forum report. Can an austerity-loaded reform plan succeed under these circumstances to put Egypt’s economy on a sustainable path? Would an IMF loan deal alone—that is, if nothing else changes on the political and security fronts—be enough to send a reassuring message to international financial markets and bring back foreign investment to Egypt? There are reasonable grounds for doubt here.

By mainly focusing on the economics of the current crisis and leaving its political roots inadequately addressed, an IMF deal will likely be risking both economic as well as political stability; thus, in all likelihood, pushing the country further to the abyss. Egypt’s post-revolution inflation, poverty, and unemployment rates are all dangerously on the rise, chiefly due to an ongoing domestic political crisis that has virtually brought the economy to its knees. So why add more heat to an already boiling pot?

This is not an argument against the need for economic policy reform in Egypt. Rather, it is an argument against the timing and the context of implementing such reforms—both of which are extremely inauspicious. True, there is an enormous amount of waste in the government subsidies program which is largely inefficient, ill-targeted, and needlessly over-consumptive (over a quarter of the state budget). But such reforms are better carried out—and would have a higher chance of success—in a politically stable, economically thriving, and socially receptive setting. Recovery through austerity amid political and social upheavals is a sure recipe for disaster.

Today, Egypt is rapidly approaching a breaking point. Foreign reserves, currently at $13.4 billion, are well below the $15 billion that the Central Bank of Egypt last December considered as “a minimum and critical level that must be preserved.” Egypt is also running out of hard cash to secure adequate amounts of imported fuel—resulting in crippling shortages that seriously threaten the upcoming wheat harvest season. Additionally, the Egyptian pound continues its nosedive against the U.S. dollar, losing 10.5 percent of its value since it began its descent late last December—jacking up prices locally and eroding purchasing power in the process. The country’s international credit standing is also on the decline; leading rating agencies constantly give Egypt and its major banks low grades and negative future outlooks. Add continued mounting domestic public debt and a yawning budget deficit to this list, and the size and scope of Egypt’s financial troubles becomes quite evident.

Under these crisis conditions, cash-strapped Egypt desperately needs the IMF loan—along with the international financial support that could follow afterwards—in order to deal with its soaring fiscal deficit and the deteriorating external position, but on terms and conditions that are entirely different from the ones proposed and endorsed by the IMF. More specifically, instead of pushing an austerity program that has little, if any, chance of success amid political turmoil and near-breakdown of internal security, the IMF and the international community should push instead for a more inclusive power-sharing government, and for a reconciliatory political transition process that should ultimately restore stability, enhance confidence in the country, and provide hope for its future.

Once this is settled, a more inclusive growth strategy that corrects the missteps of the late- Mubarak era and maps out national priorities and objectives should be designed and implemented in a more conducive political setting. If an already-fragile Egypt is “too big to fail” (for all the obvious reasons) then this is where the international pressure and focus should be. A recent Financial Timeseditorial (April 7, 2013) concluded: “As part of this [loan] deal, the IMF must insist on all power being vested in elected, accountable and transparent government. This is the only way Egypt can be refloated, as an economy and as leader of the Arab world.” One couldn’t agree more.

Mohammed Samhouri is a Cairo-based economist and a former senior fellow and lecturer at Brandeis University’s Crown Center for Middle East Studies in Boston. Follow him on Twitter @msamhouri.

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Faryda Hussein

April 22, 20138:21 am

The IMF – as stated – should also address political stability and not merely aim to achieve economic growth. But what is equally important is that social issues are addressed with just as much priority.
Yes, Egypt desperately needs money. It needs assets, it needs investment, it needs jobs. It needs to get its economy going. And it is not easy to achieve this considering the political turmoil the country is facing. The IMF should, indeed, push for more inclusive power sharing government and enhance confidence in the country. But what type of confidence are we talking about? Confidence in the government? Confidence for foreign investors that the country is stable enough for economic activities? Sure, a transparent, accountable and elected government are imperative requirements for – again – social, economic and political stability. But Egypt’s citizens need more than this. What Egypt lacks is not merely proper governance or economic development. Egypt needs a renewed social contract: agreed upon rules of the game – formal and informal – which govern a fair distribution of resources and obligations across society. A social contract is the engine which allows for inclusive economic development and this requires more than simply a new contract, designed top-down based on an agreement between a state – with little legitimacy – and a foreign organizations such as the IMF – uncomprehended and distrusted by the population – about the conditions for a loan. A social contract is not a written agreement between players. It is the backbone of a stable nation, defining – by understanding and consent – the relationship between all players. When all institutions in Egypt gain very little understanding and legitimacy, all agreements between any such institutions are immediately questioned and preferably thrown off the table – even if the agreement theoretically could be deemed beneficial. What is necessary is that first the stakeholders within the country understand, recognize and agree on their existence and the rules of engagement. They – the government, the opposition, the market, the people, everyone – need to agree on the playing field, the players and the rules of the game. Without this, any outcome will be highly contested and grievances over lost games will increase the desire for revenge – a vicious circle.
If the IMF - or any other body – really wants to help Egypt, it should aim to strengthen the social contract.

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Mohammed Samhouri

April 28, 20132:09 am

Thank you, Faryda, for taking the time to comment on my piece. I fully agree with your call that Egypt needs a new social contract. That, after all, was the central message of the Arab popular dissent which started little over two years ago: that the old social contract is no longer acceptable, i.e., the time and age where people are asked to trade away their basic political rights in return for government social services – which, as you know, have been dwindling over time in both magnitude and quality – is now gone. The transition to a new social order, however, as we are witnessing in many countries across the Arab region, could be very messy indeed, and may very well take some time -- and lots of political compromise and civil society pressure – before we see a new order based on equitable rights for all. That said, my article was mainly concerned with the immediate term, and with the immense fiscal troubles facing Egypt at the moment. My basic argument in the article was that money – in form of loans or grants – will not solve Egypt’s sinking economic ship if the domestic politics of post revolution remains in disarray, and the country security remains very fragile. Getting these two huge problems in a proper order is the sine qua non of restoring Egypt economic power house, and ultimately paves the road for all parties to agree on a new social order. Thank you again for sharing your thoughts.

To develop the country we need to synergy between socio-political system and techno-economical system.At the moment developing countries rely too much on socio-political system.I propose the Triple Helix ABG plus, Academician,Business, Government plus NGO try to develop Small Medium Enterprise that have a chance for producing products or services in the best manner. The best means competitive and manage well.Competitive means
we need appropriate science and technology so th SME can deliver Quality good with best price.The more we have good SME means country will have economic growth, job creation etc.Academician will provide science and technology, government will provide policy for start up capital, good education and research to obtainappropriate technology for the country SME, business and entrepreneur will be the receiver of technology and atart up capital provided by government. The more we have SME or profit center the better the national resilience.Because fo example plan to have 1 million SME, with 10 workers each, means we could provide job for 1 million potential workers.So all this we need science and technology based society and economy. Especially in Egypt whish majority of muslim, there 3 principles which alreadyexists, these are Surah Iqra; Ar-Rad, and Albagarah for fastabiqul khairat. Iqra for Science and technology, Ar-Rad for changing the paradigm of the society ang fastabiqul khairat for welfare of all member of society.I hope all the best for Egypt.

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